GLOBALSTAR “NOT VIABLE”
Few at the Euroconsult Financing Summit had kind words for LEO constellation Globalstar. Stephane Chenard, Euroconsult’s executive vice president and chief analyst, said there was still far too much bad news about the Mobile Satellite Services (MSS) market as a whole following the Iridium bankruptcy and much slower than expected Globalstar sales pattern. There were also problems at Orbcomm, “the company is a fire sale”, said one speaker, “having achieved barely 30,000 subs and failing to meet its banker’s obligations.”
The MSS sector was still “singing the blues”, said Chenard. Indeed, a report on Iridium and Globalstar from Banc of America Securities (BoA) could not be more pessimistic. “We have substantial doubts about [Iridium’s] prospects.”
BoA’s senior satellite analyst, Armand Musey, said the overall MSS sector was “cold” in terms of future prospects. As for Globalstar’s miserable 13,000 subscriber level, BoA was scathing, saying, “We do not believe it is a viable project.”
Marcus Jones, Moody’s Investors Services senior analyst, said, “Things haven’t got any better [for the MSS sector] over the past year. Globalstar is far from shining bright.” He added that the so-called soft launch was appearing to be softer than anyone’s predictions. “Slow subscriber growth, lower [than expected] usage and failing to reach its self- proclaimed minimum targets” were all bad news for Globalstar, said Jones.
It was a similar view from William Kidd, senior satellite analyst at CE Unterberg Towin, the New York-based investment bankers. Kidd said the Iridium debacle proved that the “if you build it, they will come” rule had failed to apply. Kidd added that the investment community was having to learn a new ‘worst case scenario’ here, with Iridium’s assets having zero value, which was “a rather unique lesson, particularly for multi-billion dollar telecom projects.” As regards Orbcomm, Kidd added that the company “continues to baffle us.”
Part of the analysts concerns over Globalstar came as a result of a close examination of two quarter’s usage. Globalstar’s first quarter (to March 1) generated 550,000 minutes of use, even thought the system was active for only 30 days. Much depended on Q2, the first full 90 days of operation. While gross revenues grew slightly from $609,000 (677,043E) to $708,000 (787,104E, actual minutes of use climbed from 550,000 to 1.13 million.
And this did not impress the analysts. According to Musey’s rough calculations, Globalstar needs between 1.48 million and 1.85m subscribers using the system for around 50 minutes a month, or 740,000-930,000 subs using 100 minutes a month, to break even. The prognosis is not good.
There is a knock-on effect, with Loral Space & Communications (LS&C), which is a 42 per cent owner of Globalstar, and the prime contractor for the constellation and a guarantor of $500 million-worth of credit line. Globalstar is currently financed through the next six months (to end March 2001) thanks to having converted a Chase Manhattan loan guarantee of $250m into a three year $250m subordinated note. BoA says it means the following companies have some financial exposure: Lockheed Martin ($150m); Loral ($68m); Qualcomm ($22m) and Europe’s DASA ($10m).
BoA says Globalstar is burning cash at the rate of $100-$125 million a year, and that Loral’s exposure isn’t limited to a potential writing off of Globalstar’s $1.3 billion- worth of in-orbit and ground-based ‘assets’. BoA expects Loral to inject further funds before giving up on Globalstar, perhaps as much as $200 million “before it severely affects Loral’s core business strategy.”
Perhaps, not surprisingly, only a few of Euroconsult’s invitations to the MSS sector resulted in speakers! One brave soul was New Ico’s Patrick MacDougal, its senior vice president of corporate development. “One year ago we were painfully in bankruptcy, and we are still in a metamorphosing stage,” he said, as the former ICO and Teledesic concluded their merger plans. But the company has not been idle, he stressed. “We have torn up every distribution agreement we had. We start with a clean sheet and want to have direct distribution outlets in as many markets as possible.”
New Ico’s strategy, helped with Craig McCaw and Zee TV’s Subhash Chandra, joint $1.2 billion cash injection is to boost voice transmit quality as well as prepare “next generation broadband services”. MacDougal says New Ico is looking at wireless in the home devices such as Bluetooth as the answer to get ICO calls functioning within buildings and homes.
“There are real customers out there and [maritime, transportation, aeronautical and governmental] segments are there to be tapped. 3G will surely be built out, but much more slowly than our service.” New Ico expects to go live in 2002.
One operator seemed to escape the overall MSS condemnation, and that was Inmarsat Holdings, which is very much focused on the maritime, transportation etc segments. Michael Storey, Inmarsat’s president and CEO, gave as upbeat a presentation as he could have given as Inmarsat is slap, bang in the middle of its own quiet period and Inmarsat’s lawyers had forbidden him to use anything as colourful as an adjective “whatever they are” in describing expectations. He reminded the Paris delegates that Inmarsat is profitable, has been around 20 years and is operating at a very healthy 76 per cent EBITDA margin on sales.
Inmarsat has around 184,000 terminals in operation, and Storey says the company is not setting impossible targets in seeking to boost that number to around 600,000 over the next ten years, especially with its new G-BAN (Global Broadband Area Network) 3G-like technology. He may be right.